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Understanding Turnaround Management

Introduction

Turnaround management is a process of corporate revival from a position of bankruptcy or near bankruptcy. This management procedure involves processes review, analysis of causes of failure, activity oriented costing, and SWOT (strength, weakness, opportunity, and threat) analysis. After analysis, a strategic plan is devised and restructuring initiated. The job of a turnaround management team is to bring a bankrupt company back to its solvent state. A fundamental assumption made in this process is that a company is capable of making a comeback if the reasons of failure are addressed appropriately.

For a turnaround manager it is important to ascertain the reason for a company going insolvent or bankrupt as that might help in the recovery process.

Reasons for Bankruptcy and Turnaround

Revenue downturn – This is a common cause of insolvency in debt ridden economies or during times of economic depression. Loss in revenue because of reduced market demand leads to suspension of production and unutilized resources. The normal consequences are retrenchment of employees, closure of manufacturing units, and selling out of capital. All these are genuine causes of bankruptcy which could be avoided if a global approach is followed. While operating on a global scale the market reach increases which could help an industry to sustain even if there is a slump in domestic economy.

High operating costs – Excessively high operational costs such as wages, interests, rent, and depreciation could cut into a commercial organization’s profitable earnings. Increase in fixed costs without a corresponding increase in revenue is a plausible reason for insolvency. Such increase in an environment of tough competition is a warning signal for companies demanding immediate attention. Way out of such a situation is deployment of latest technologies and manufacturing processes.

Insufficient resources – In a global playing scenario it is crucial to have sustained supply of resources and that too at reasonable cost. The essence of globalization lies in procuring resources from the most viable sources to keep cost within control and price of goods competitive. Without adequate access to these cheap sources sustenance becomes difficult in a competitive environment. Procuring from expensive sources being a losing proposal for a commercial body could lead to its insolvency and bankruptcy. To overcome this problem there should be a continuous supply of resources both human and material so that production and marketing does not suffer. Global procurement is the key to such shortage issues.

Overtly optimistic projections – Future projections play a vital role is determining production planning and business strategy. Overtly optimistic projections could be suicidal for businesses particularly in highly competitive marketing conditions. Even a slight change in price or market demand could bring about significant changes in production planning. Strategic planning is an essential part of current generation management. There is not much space to play around with as competition is tough and even a slight hesitation is enough for bringing in competition. Highly optimistic projections could lead to wastage of resources and revenue crunch. Surplus production caused by erroneous projection amounts in huge losses of revenue and increased debt burdens. Turnaround managers to tide over such situations look towards overseas market to sell their excess production. Trained professionals and experts in determining future trends estimate a marketing pattern and hence are able to fix production levels. Too aggressive marketing could result in consumers’ apathy and hence affect a brand’s popularity.

Inappropriate financial control – Often faulty financial monitoring could lead to insolvency. Misappropriation of available resources, excessive rents, uncontrolled expenses, and fixed overheads add to a company’s cost. All these abnormal causes could lead to bankruptcy. Financial control is mandatory for manufacturing and marketing organizations especially in a competitive environment. This becomes even more pertinent while addressing a global clientele.

Powerful competitor – In this generation of liberalized trade the existence of competitors in any market is natural. Organizations need to be armed accordingly to ward off such intrusions or face the trouble of insolvency. Competitors should be matched with pricing or quality product. Customers are always willing to pay small increments for superior goods. Competitors must never be allowed to enjoy dual advantages of low price and superior quality of goods.

Excessive debt burden – This is a common cause of insolvency for commercial organizations. There could be several reasons for debt which only result in bankruptcy or selling out.

Processes involved in overcoming debt ridden state

From an insolvent to solvent stage an organisation has to go through a certain sequence:

Assessment stage – This is the first stage when decline is first observed. The cause or causes of decline are identified and assessed.

Acute needs stage – In certain cases the cause of insolvency could be temporary and remedied through a corrective action. Acute measures of recovery need to be adapted which could set the course for recovery.

Restructuring stage – Some cases of insolvency is of a severe nature and cannot be overcome by short term corrective measures. More deliberate and conscious efforts of recovery may be solicited. Here performance needs to be scrutinized and analyzed thoroughly. Wherever needed, a restructuring could be done.

Stabilization stage – From ‘restructuring’ an organization moves on to ‘stabilization’ stage in which it begins consolidating its recovery. In this stage a company’s management plays a stellar role by deciding on the course of recovery to be followed. Path to recovery could be decentralized and participative; centralised and secretive, or rational and analytic. The strength of an organization lies in the time it takes to stabilize and begin its course of recovery from bankruptcy.

Revitalization stage – In the revitalization stage, a recovering company concentrates on the chosen stabilization route. Customers, suppliers and employees could all be party to such a revitalization process. Here it needs to be noted that in certain cases turnaround could be difficult because of political pressures.

To Wrap Up

In turnaround management, the performance of private enterprises is much better when compared to public sector undertakings or government concerns. The principal reason for this is politicization of the entire process of recovery in government concerns. Outstanding case studies of recovery are observable for privately owned organizations.